In the CERCLA world, the low hanging fruit has largely been picked. Long gone are the days of the run-of-the-mill $3M RI/FS leading up to a $30M RD/RA. We are getting to the tough stuff now – the megasites – and all the difficult issues related to PRP involvement in RD/RA (whether via consent decree settlement or compliance with a UAO) are on steroids.

One of those more difficult issues in the context of multi-party megasites relates to financial assurance (“FA”) requirements in RD/RA UAOs and consent decrees. The 29-page April 2015 EPA FA Guidance, while helpful on some levels, is remarkably thin (2 paragraphs) when it comes to dealing with multi-party sites. And in a breathtaking understatement, especially with regard to big-ticket sites, EPA notes in the guidance that “FA matters can get complicated with multi-PRP-led cleanups….”

Recently, added pressure has been placed on the Agency in this area as a result of a March 31, 2016 EPA Inspector General report stating that “[d]ata quality deficiencies and a lack of internal controls prevent the EPA from properly overseeing and managing its financial assurance program for RCRA and CERCLA.” In particular, EPA’s OIG analysis indicates (among other things) that there are 128 CERCLA sites with no (or expired) financial assurance in place and the estimated cleanup costs for those sites is over $3.7B.

As Proposed Plans and RODs continue to roll out from the Agency with billion-dollar-plus price tags – typically related to multi-party contaminated sediment sites – the difficulty of up-front funding of these hugely expensive remedies becomes obvious. PRPs at multi-party sites will have varying abilities and business desires to up-front fund liquid FA mechanisms, and while some entities will prefer (and be able) to provide assurance by a financial test or corporate guarantee, many will not.

And EPA’s willingness to deal with multiple mechanisms (either different mechanisms from multiple parties or multiple mechanisms from a PRP group) is limited. In fact, the use of multiple financial assurance mechanisms is discouraged under the 2015 FA Guidance. Further, the September 2014 Model Remedial Design / Remedial Action Consent Decree along with the September 2015 Model Unilateral Order for Remedial Design / Remedial Action specifically state that while PRPs may use multiple mechanisms, this can only occur with liquid mechanisms – trust funds, surety bonds guaranteeing payment or letters of credit. Interestingly, the 2014 Model CD also allows the use of insurance policies, indicating that the Agency’s thinking about the liquidity of insurance policies has evolved.

The viability of financial assurances is not simply an EPA-driven issue. Given the multi-decade cleanup process and huge stakes involved at CERCLA megasites, and with the overlay of joint and several liability, PRPs need to be thinking carefully about the financial viability of their co-PRPs when entering into CDs or PRP agreements to perform under a UAO. And regardless of how EPA ultimately decides to deal with this issue at megasites, PRPs no doubt will be pushing each other to ensure long-term equitable responsibility for meeting their FA obligations at this new breed of Superfund sites.

Earlier this year, I posted in this blog a discussion of EPA’s 35 year – and still unfinished – journey toward full implementation of the financial assurance (“FA”) mandate of CERCLA Section 108(b). Section 108(b) obligates EPA to identify “classes of facilities” that will be required to demonstrate financial ability to respond to future releases of hazardous substances and to promulgate rules establishing those FA requirements. Inexplicably, Section 108(b) remained dormant for 28 years. Litigation initiated by NGOs in 2009 and 2010 prompted the agency to identify the hardrock mining and several other industries as priority targets for regulation. The task of developing the FA requirements for those industries, however, remained a work-in-progress.

Ever vigilant, environmental advocacy groups filed a Petition for Writ of Mandamus in August 2014 taking EPA to task for its delays and inaction. The theme of the litigation is that (1) Section 108(b) is a critical component of CERCLA’s overall scheme, (2) EPA’s failure to issue FA rules has resulted in cleanup delays, funding shortfalls and increased public health risks, and (3) EPA’s inaction cannot be justified by competing priorities within the agency. In May of this year, the D.C. Circuit Court of Appeals issued an order requiring EPA to expedite implementation of Section 108(b) to the greatest extent possible, update its rulemaking schedule for the identified industries, and disclose to the litigants the regulatory “framework” for the hardrock mining industry, which EPA acknowledged had been completed. EPA’s website suggests that it will publish the hardrock mining rule in August 2016.

In short—the more things change, the more they stay the same. Perhaps the low priority assigned to this CERCLA provision suggests that the cleanup response track-record of even the priority industries may not justify a need to regulate under Section 108(b) - a process that will involve complex issues with significant financial consequences. Nevertheless, Section 108(b) remains the law of the land. Congress must either follow-through with its periodic efforts to amend Section 108(b) or EPA must finish this long journey. No benefit inures to the public, affected industries or the agency from the existing uncertainties and delays.

EPA’s foot-dragging in implementing Section 108(b) is in contrast with its recent action emphasizing FA as an enforcement priority in CERCLA settlement agreements and UAOs. The agency’s April 2015 Guidance to Regional Counsel is touted as the first comprehensive document issued by EPA to assist with the development of FA requirements and provide transparency in the use of its Superfund authority. Space limitations do not permit a detailed review of this 22 page guidance, which includes modified model FA language and sample documents. Some take-aways from a first read of the guidance:

The Guidance does not address future Section 108(b) requirements.

It is suggested that the EPA Regions have flexibility to include or exclude certain FA mechanisms at specific sites, BUT headquarters consultation and approval is often necessary.

The financial test and corporate guaranty mechanisms are perceived by EPA as having a higher risk of not achieving FA objectives and imposing increased administrative burdens on the Agency; therefore, it is suggested that those mechanisms should be used with caution.

The Guidance emphasizes the need for agency diligence in the ongoing evaluation of site conditions and costs, with increases in the initial FA amount to be required as appropriate.

Practical considerations for evaluating the financial test and guaranty FA options are addressed in an appendix.

Notwithstanding suggestions of flexibility in the use of FA tools on a site-by-site basis, this comprehensive new guidance does not appear to include much good news for the settling PRP. In fact, EPA’s stated concerns on the use of the financial test, corporate guaranty and insurance policy FA mechanisms could further complicate an already contentious issue in CERCLA settlement negotiations. What impact the guidance may have on FA negotiations as new sites arise, of course, remains to be seen.

Financial responsibility is a familiar environmental law concept. Many of us have negotiated financial assurance provisions in site consent agreements. RCRA’s closure and post-closure financial responsibility requirements at treatment, storage and disposal (TSD) facilities are well-established. Financial responsibility obligations are also a component of many other federal and state environmental programs.

I suspect, however, that few practitioners are aware of a CERCLA financial responsibility provision that has been in existence since the Act’s inception. CERCLA Section 108(b) mandates that the President identify classes of facilities that will be required to demonstrate a financial ability to cleanup releases of hazardous substances. These facilities will be obligated to provide evidence of financial responsibility that is consistent with the degree and duration of the risks associated with their production, handling, treatment, storage and disposal of hazardous substances. The requirements of Section 108(b) are intended to assure availability of funds should the businesses go bankrupt or otherwise become financially unable to conduct future environmental response actions.

Section 108(b) generally imposes two regulatory tasks on EPA: Identify the classes of facilities for which financial responsibility requirements will be developed and promulgate regulations establishing those requirements. For twenty-eight years, EPA deferred breathing regulatory life into Section 108(b). EPA’s inattention to Section 108(b) ceased to be an option in 2008. Litigation commenced by the Sierra Club and others resulted in a federal court order requiring EPA to identify industries that would be first in line for Section 108(b) rulemaking. EPA determined in 2009 that the hard rock mining industry would be its first priority. In early 2010, EPA published advance notice of its intent to regulate additional classes of Section 108(b) facilities: chemical manufacturing, petroleum and coal products manufacturing and the electric power generation, transmission and distribution industry.

Although deadlines have come and gone, to date no financial responsibility rules have been proposed. Nevertheless, the lifeless form of Section 108(b) has finally begun to stir. EPA advised Senate lawmakers in June of this year that financial responsibility requirements for the hard rock mining industry would be issued by 2016. In the meantime, the NGOs remain ever vigilant. Armed with data indicating that, particularly during the recent recession, taxpayers and disadvantaged communities suffered the adverse consequences of EPA’s inaction, environmental advocacy groups filed a Petition for Writ of Mandamus demanding that the agency promptly comply with Section 108(b)’s rulemaking requirements. In contrast, many industry groups contended that the Section 108(b) rulemaking being developed is based on a flawed analysis of potential risk and ignores the impact of existing state and federal financial responsibility laws and regulations that have achieved most of the objectives of Section 108(b). Legislation introduced in the House of Representatives in 2013, generally supported by the affected industries, included significant amendments to CERCLA Sections 108(b) and 114(d).

Whether you believe that Section 108(b) is outdated and unnecessary, or that immediate and comprehensive implementation of its mandates is of paramount importance, I would submit that EPA’s seemingly cautious approach to Section 108(b) rulemaking is justifiable. Considering the financial consequences, the identification of target industries must be based on a careful and comprehensive evaluation of the actual risks associated with a particular industry’s handling of hazardous substances and the historic “track-record” of that industry’s ability to financially respond to releases. The extent to which existing federal and state financial assurance programs address the identified risks must also be carefully scrutinized to avoid unnecessary cost and duplication. EPA’s selection of acceptable financial assurance mechanisms is also of critical importance. Elimination of the so-called “financial test” method, for example, may impact the capacity of financial and credit markets to provide the necessary financial assurance and adversely affect global competitiveness.

Future rulemaking that is based on a thorough and defensible analysis of actual risk and is limited to filling in any gaps in existing financial assurance programs will best serve the public, the environment and the regulated community.

Since the early days of the Superfund program, EPA has required settling parties to provide financial assurance of the PRPs’ (potentially responsible parties) ability to perform the cleanup work. EPA regulations afford PRPs a choice of financial assurance mechanisms to fulfill this requirement including: a self-funded trust, bonds, letters of credit, insurance or the satisfaction of the “financial test” provided in 40 CFR §264.143(f).

As originally promulgated, the financial test applied to owners and operators of hazardous waste facilities permitted under RCRA. EPA has adopted this test for Superfund financial assurance requirements and state agencies have likewise borrowed it for their own programs. For many years, the “financial test” was the least cumbersome method for PRPs to satisfy their long-term financial assurance obligations. It was also attractive to PRPs because as long as at least one large company met the test, the other PRPs could save the cost of employing alternative financial assurance mechanisms such as prefunding their entire obligation or purchasing letters of credit. Further, while the financial test in 40 CFR §264.143(f) does include very specific and complex financial criteria, in practice EPA often found submission of financial statements or other public financial reports by large companies to be sufficient.

In recent years, perhaps in recognition of the new economic order where major airlines, automobile manufacturers and even manufacturers of famous brands such as Twinkies have filed for bankruptcy, EPA has made strict compliance with the financial means test a settlement priority. All of the forms for financial assurance are now prescribed via EPA’s website. Perhaps the most challenging form for a financial means proponent is the sworn letter from the company’s CFO or accountant certifying that the company satisfies the different elements of the financial test. The letter must be updated and resubmitted every year. The form letter may be found here.

In an era where CFOs and accountants are already burdened with a host of new Sarbanes-Oxley requirements and other regulatory controls, companies are less than enthusiastic about preparing another set of certifications to EPA concerning their company’s financial status. A further challenge presented by the letter is that it must be submitted on behalf of the specific entity participating in the settlement or its parent. Often, a parent corporation cannot or does not want to guaranty a subsidiary’s obligations, and its subsidiary’s financials may not be maintained in a format which makes compliance with the EPA letter practical or feasible.

EPA’s renewed emphasis on financial assurance requirements is understandable in today’s economic climate and even has some benefit for performing parties interested in ensuring that other settling PRPs likewise perform. Indeed, PRP Groups, with the self-interest of protecting themselves from each others’ business failures, often require their group members to provide letters of credit for the benefit of the Group or prefund their Superfund settlement shares into a Group- controlled trust, even if other financial assurance mechanisms have been selected to satisfy EPA.

Whether PRPs like it or not, what is clear is that the era of less than strict compliance with EPA’s financial assurance requirements for Superfund settlements is over.

American College of Environmental Lawyers, The ACOEL, is a professionalassociation of lawyers distinguished by experience and high standards in the practice of environmental law, ethics, and the development of environmental law.